How will investors handle unfamiliar challenges?

By DAVID MOON, Moon Capital Management, LLC
February 7, 2010


On the Friday of the “Blizzard of Ten,” I was listening to the Hallerin Hilton Hill radio show as I drove from Nashville to Knoxville. At 5:45 AM, Mr. Hill and his sidekick, the much acclaimed newsman Dave Foulk, focused on the dangers of the coming snowstorm. Twelve hours later on the same station, Phil Williams and his afternoon callers were still discussing what was expected to be the largest Knoxville snowstorm since 1993.

Although the snow never really came, the devastation did. Schools were closed. Business meetings were cancelled. My office building was deserted. Southern drivers, not accustom to even a dusting of powder, slid their cars off roads and into each other.

Although they can’t handle even the smallest amount of snow, I suspect that people from Alabama are much better at driving in deep mud than a typical New Yorker. Whether they’re from the snowy north or the deep south, people generally respond better to familiar conditions, and they often panic in unfamiliar environments.

The same is true with your money. When presented with unfamiliar circumstances, people tend to get goofy.

It never dawned on some people that they wouldn’t always be able to renew home equity lines of credit at higher limits, on an ever-growing appraised home value. Surprise. The road gets slippery when the bank wants you to actually repay some principal or home prices in your neighborhood don’t annually increase 8 percent.

Few people alive today ever experienced a stock market crash like October 2007 to March 2009. Too many investors acted like panicked drivers or school officials and slammed on the brakes; they sold their stocks and missed a 60 percent recovery in the last nine months of 2009.

Ten percent unemployment has exposed two-income families that require every penny of both salaries just to pay the bills each month. Ask the credit card companies about rising default rates. Ten percent unemployment obviously wasn’t built into their models of life, either.

What about the future? Are there changing economic patterns that are likely to present investors with unfamiliar challenges – and the renewed opportunity to engage in silly behavior?

Probably.

Falling inflation makes for a very forgiving investment environment. When interest rates are falling to near zero, you can make a bunch of mistakes and still make money. The value of even a poor investment is buoyed by falling cost of capital.

For most of the past 30 years, we lived in an environment where interest rates, inflation, capital gain taxes, personal tax rates and business taxes all declined. Almost everything that could go right did.

Imagine when those conditions reverse. Those are not conditions in which most of us have any experience.

When it happens – and it will happen – will you have any idea how to act?


David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

Add me to your commentary distribution list.

MCM website